US: Fed could yet be called into action

The Federal Reserve voted 10-0 in favour of leaving the Fed funds target rate at 0-0.25% and will maintain bond-buying “at least at the current pace”.

There were barely any changes in the text of the accompanying statement with officials reiterating that in their view ”the ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term”.

Their forward guidance is also unchanged with the current level of interest rates expected to be maintained “until labor market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

Remember that their September dot diagram of individual FOMC member predictions has rates on hold through to the end of 2023.

None of this comes as a surprise. The Fed would have been reluctant to be drawn into what is already a fraught political backdrop as the vote count continues and threats of prolonged legal wrangling linger.

Fed Chair Jerome Powell was reluctant to offer much on what the election means for the economy and in turn central bank policy

This caution continued into the press conference with Fed Chair Jerome Powell reluctant to offer much on what the election means for the economy and in turn central bank policy. Nonetheless, he continues to make the argument that more fiscal policy support “may be needed” since the pace of improvement in the economy has “moderated”. Moreover, not everyone has benefited to the same extent from the upturn so far and the pandemic presents ongoing headwinds for growth.

This ties in with Jerome Powell's repeated assertion that monetary policy cannot generate demand. If you want that, it has to be through government spending - although he was at pains to point out that it isn't for the Fed to give direct advice to Congress on the size or timing of additional fiscal stimulus. These comments have seen the dollar come under pressure again - similar to previous press conferences at which he has argued for more stimulus - since it helps the reflation trade case.

This in turn supports currencies more tied to the economic cycle such as NOK, AUD and to a lesser extent, EUR.